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Converge Electronic Components Distribution Podcast


What You Need to Know About a Shortage Market (6:56)

Electronic components shortages are not all together that uncommon. They typically occur when supply and demand get out of balance causing both lead times and prices to go sky-high in some cases. This Converge podcast will cover topics such as: what a shortage market is, how it occurs in the electronic component industry, and what buyers and sellers need to know about it so they can better prepared for it. Download

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Transcription

Scot Hennessey:

Back in the year 2000-1999, we had a memorable shortage around tantalum capacitors. Tantalum capacitors go into a lot of different types of products so demand was extensive. It led to extreme allocation as far out as a year. And the prices were 5, 10, 20X the standard cost.

Paul Gillin:

That’s Scot Hennessey, Director of Sales for the Americas at Converge describing an extreme but not all together uncommon case of electronic components shortages. The kind that occur when supply and demand get out of balance and both lead times and prices can go sky-high. Shortages are a fact of life in the (electronic) components business but that doesn’t mean they have to derail your business

In this Converge podcast we will find out what a shortage market entails (in the electronic component industry), and what buyers and sellers need to know about it. Hi, I am your host Paul Gillin and I am speaking to Scot Hennessy who has extensive experience helping Converge clients mitigate the effects of component shortages.

Scot, we know the electronic components market goes through cycles of excess and shortage for key commodities, as well as more “stable” periods in between. But what do we really need to know about a shortage market that will help us to be better prepared to deal with one? First, let’s start with the basics.

What are some of the telltale signs of a shortage market?


Scott Hennessey:

A shortage market is typically defined by allocation, difficult to find parts, parts that could be end of life, obsolete, and also typical in a shortage market is price increases. In cases where allocation is prevalent, sometimes lead times can go out 16, 18, 40 weeks – it all depends on what is happening in the market for certain products.

Paul Gillin:

What do manufacturers typically do in a shortage market?


Scot Hennessey:

(Manufacturers) Basically try to meet their demand. Their sales and marketing set the demand, and their production is set to produce products in accordance. Finding product could be difficult to do, which is typically why you would need to work with an independent distributor, because your direct component manufacturers or your franchise distributors might not have product. It could be allocated.
If the lead time is too far and doesn’t meet their needs, they’ll try to come perhaps to the independent channel, the open market, to a company like Converge, to see if Converge couldn’t supply product in more of a just-in-time basis. So, eliminating lead time. In that case, price will typically be at a premium, but again, you’re going to be able to get the product you need at a time you need it to keep those production lines running, keep your contracts in order, and your product selling.

Paul Gillin:

What causes a shortage market?


Scot Hennessey:

Shortage markets are typically caused by two different types of dynamics, one being a demand-based dynamic and the second being a supply-based dynamic. On the demand-based, it could be due to new technology that comes out; inaccurate forecasts sometimes can lead to demand-based shortages; as well as seasonal demands. The opposite of that would be a supply-based type of shortage, which is typically caused on the production end due to raw material shortages, parts going end-of-life, or natural disasters such as an earthquake or a flood.

Paul Gillin:

Can you give an example of a memorable shortage market?


Scot Hennessey:

Back in the year 2000, 1999, we had a memorable shortage around tantalum capacitors. I mentioned raw material being difficult to get. In this case, (the metal alloy) tantalum was very difficult to procure, and therefore, produce the tantalum capacitors that the market needed. Tantalum capacitors go in a lot of different products so demand was extensive. It led to extreme allocation as far out as a year. And the prices were five, ten, 20x the standard cost.

Paul Gillin:

How did Converge help manufacturers during that time?

Scot Hennessey:

Converge basically helped people keep their manufacturing lines running and keep producing the products that they were aiming to produce and sell by providing just-in-time component services. If you needed 100 thousand capacitors, Converge would likely have a product source that they could buy from and deliver to you in order to meet your supply needs.

Paul Gillin:

Is there anything that companies can do to prepare for a shortage market?


Scot Hennessey:

Before a shortage market begins or an OEM finds himself in a position of being short, they need to have a game plan outlined where they’ve built a contingency plan in partnerships to address a market. My recommendation would be to look at the independent base you’re working with right now, look to determine who is best in class, potentially by going out and doing an audit, looking at how they conduct their business and what value they bring to you. For instance, what type of market intelligence are they able to provide you so that you can be knowledgeable about your procurement decisions made in the open market. Do they have a solid reputation? How do they manage their vendor base? Do they have a global infrastructure? … Are they inspecting product to the IDEA 10/10 standard?

Paul Gillin:

Why is inspecting product so important?


Scot Hennessey:

There is significant risk of counterfeit in really any market, but I think it’s increased in a shortage market because companies may look to buy product from companies that they typically wouldn’t ever consider. They never would have approved them in their supply chains to be a potential vendor, but they do, because product is needed and it’s needed right away.

Paul Gillin:

What type of quality protection does Converge offer?


Scot Hennessey:

We’ve been in the business for over 30 years and our quality processes and quality team globally is best in class. Because we’ve been in business for 30 years, we’ve established long-standing relationships that allow us to buy from contract manufacturers and OEMs who have excess inventory and have traceability for that product to ensure its quality.
Our inspection process is based on a 76-point process that includes the IDEA 10/10 standard plus some additional steps that we’ve implemented ourselves.

Paul Gillin:

So what is the bottom line takeaway for our listeners?


Scot Hennessey:

Every company, every buyer, is going to be faced with a shortage at some point in time. They’re going to have to go to the independent channel, to the open market, to try to resolve those issues. Because of that, you should plan ahead. Look to understand who the players are in the space. Get out into the field. Get to know them. Conduct audits to determine that they do what they say they do. And establish a preferred group so that you have a couple of options for best in class partnerships and relationships. And if you find yourself in need, you’re going to be able to get the product that you need at the price you need it, when you need it, and you’ll know with confidence that your supply chain is protected.

Paul Gillin:

Great advice. Scot thanks so much for sharing your expert insight. And thank you for listening to this Converge podcast “What You Need to Know About a Shortage Market.” My name is Paul Gillin.